Amazon Shares Hit Milestone as E-Commerce Battle Heats Up

By David Jones
May 30, 2017 3:03 PM PT

Amazon stock surged to more than US$1,000 for the first time in early trading on Tuesday, marking a milestone for the dominant e-commerce retailer and leaving its closest competitors still trying to figure out a path to closing the gap.

Amazon's shares hovered near $997 in late mid-afternoon trading after reaching $1001.20 earlier in the day, an all-time-high for the stock. Friday's closing price was $995.78.

"Amazon's advantage over brick and mortar, which is limited to the online segment of retail -- [which] comprises less than 10 percent of total retail sales in the U.S. -- is based on its status as an early mover, investing heavily to build the best website and the benefits to its online business of focusing solely on the one channel," said Charlie O'Shea, lead retail analyst at
Moody's.

Brick-and-mortar retail companies still retain the overall advantage by virtue of their store bases continuing to generate more than 90 percent of overall U.S. retail sales, while their online business currently augments that channel, he told the E-Commerce Times.

During the first quarter, e-commerce sales accounted for $105.7 billion, or 8.5 percent of total retail sales, noted the National Retail Federation, which cited Census Bureau estimates. Retail sales are expected to increase between 3.7 percent and 4.2 percent for the year, according to the NRF, while overall online sales are expected to increase between 8 percent and 12 percent.

Earnings Growth

Amazon reported a rise in net income during the first quarter, to $724 million, or $1.48 a share. Sales were $35.7 billion, a 24 percent increase from a year ago, excluding a one-time charge. The company forecast sales of between $35.25 billion and $37.75 billion for the second quarter, which would represent growth of 16 percent to 24 percent from year-ago figures.

The key to Amazon's dominance has been growth in its Prime membership, which has doubled to more than 80 million members in the past two years -- 38 percent above March 2016 figures, according to Consumer Intelligence Research Partners.

Prime members spend $1,300 per year on Amazon purchases, on average, compared to other customers, who average about $700 per year, according to CIRP.

Much of Amazon's retail strength in recent months is reflected in the continued growth of its digital assistant products.

For instance, about 10.7 million U.S. consumers have purchased an Amazon Echo device since the line's 2014 launch, CIRP reported earlier this month. Those figures cover sales of the original Echo, the Echo Dot and the Amazon Tap.

Amazon sold more than 2.5 million Echo devices between January and March of this year, CIRP estimated.

While Amazon is widely known for its e-commerce business, an increasing share of its profitability stems from Amazon Web Services, its cloud computing operations. That segment accounted for $3.66 billion in sales -- a 43 percent increase from $2.57 billion in the year-ago quarter, according to the company's 10-Q report filed with the Securities and Exchange Commission.

"Wall Street has recognized that Amazon has not only built a powerful e-commerce business [but that] its AWS division has also become a powerful platform," said Jeffrey Kaplan, managing director of ThinkStrategies.

Amazon has been "creating high growth and profitable new business opportunities, including ... ambient computing capabilities like Echo smart systems," he told the E-Commerce Times.

Warning Signs

While Amazon continues to dominate the e-commerce space, the company cannot assume its competitors will walk away from the fight. Walmart, which acquired rival e-commerce site Jet.com in 2016, reported robust e-commerce growth of 63 percent during the quarter -- a much faster pace than Amazon's e-commerce surge over the same period.

The growth was fueled by the introduction of a new two-day free shipping program for customers spending $35 or more, as well as discounts to customers who purchased certain goods online and picked them up at Walmart stores, thus saving costs on last-mile delivery.

Amazon's soaring stock price is quite a story, said Paula Rosenblum, managing partner at RSR Research, but she warned that investors have given Amazon more benefit of the doubt than its retail competitors typically receive.

At some point, Amazon is going to have to demonstrate real profitability from its core retail business, Rosenblum said.

"Sooner or later it's going to have to deliver real earnings from its retail operations," Rosenblum told the E-Commerce Times, "and it's going to have to do that while keeping prices down."

David Jones is a freelance writer based in Essex County, New Jersey. He has written for Reuters, Bloomberg, Crain's New York Business and The New York Times.